International Trade, Factor Movements, and the Environment

To conclude, the conflict between trade and the environment is a difficult one
to solve. The general policy implication of this study--sound environmental
policies plus free trade--should be agreeable to everyone because it maximizes
the pie that is to be shared. But unanimity vanishes when a decision is to be
made on how to implement this rule. There are incentives to free-ride both in
the fields of environmental and trade policies. And the property rights to
global environmental resources are not defined. Thus, it is unclear who should
pay and who should receive compensation. Hence there is a conflict between
countries wishing to use their power in international markets as a weapon for
the worldwide implementation of sound environmental policies, and other
countries arguing that global environmental problems can better be solved
with free trade and side payments that allow them to introduce environmentally friendly production technologies. Both arguments are rational and understandable from the corresponding national points of view. From a more global
perspective, however, both of them are deficient. Compensation payments to
polluters may induce strategic behaviour aiming at the entitlement to receive
such payments, e.g. by means of increased emissions. Green trade restrictions
are likely to be captured by protectionist interests and their availability as a second-best option may deter governments from going the difficult way to achieve
the first best. Thus, given the entrenchment of governments and people behind
their individually rational points of view, the reconciliation of international
trade and the environment is a utopian perspective. None the less, we should
keep on working for it.

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